US fiscal cliff fears halt dollar's run

THE Australian dollar was slightly lower on Friday on investor concerns about the looming fiscal cliff damaging the US economy.

THE Australian dollar was slightly lower on Friday on investor concerns about the looming fiscal cliff damaging the US economy.

The dollar was trading at US105.44¢, down from US105.52¢ at Thursday's close.

A Commonwealth Bank currency strategist, Joseph Capurso, said the dollar had started the day weak, on concerns about the fiscal cliff, but had risen slightly on Chinese manufacturing data.

"Chinese flash PMI (purchasing managers' index) was slightly higher than expected, and regional sharemarkets are quite strong, so that usually gives the Aussie a bit of a bump up," he said.

"However, liquidity is quite thin at this time of year, so it's hard to read much into it."

Mr Capurso said the US fiscal cliff would dominate the market next week, and heading into the year's end. "The market's been very patient with the politicians, but that patience might not last much longer," he said.

US political leaders continue to debate how to resolve the fiscal cliff - a series of tax rises and spending cuts that will come in at the beginning of next year.

Also notable on Friday was the Australian dollar/Japanese yen cross - with the dollar trading at ¥88.47, its highest since March.

Mr Capurso said weakness in the yen could be due to concerns about Japan's general election on December 16, and expectations of economic stimulus by the central bank.

The December 10-year bond futures contract was at 96.690 (implying a yield of 3.310 per cent), down from 96.770 (3.230 per cent) on Thursday. The three-year contract was trading at 97.185 (2.815 per cent), down from 97.260 (2.740 per cent).

Deutsche Bank bond trader Andrew Bryan said the fall was driven by a lack of liquidity in the market, rather than local or international economic concerns.

"The trend at the moment is mainly driven by currency moves, particularly the Aussie-yen cross," he said.

"There's not much liquidity in the market at the moment, so any flows are having an outsize effect."

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